NON PERFORMING ASSETS

BACHELOR OF COMMERCE

BANKING & INSURANCE

SEMESTER V

(2010-2011)

SUBMITTED BY-

MILTON GREGORY MASCARENHAS

SEAT NO –

TOLANI COLLEGE OF COMMERCE,

150-151, SHER-E-PUNJAB SOCIETY,

GURU GOBIND SINGH ROAD,

ANDHERI EAST,

MUMBAI -400093

NON PERFORMING ASSETS

BACHELOR OF COMMERCE

BANKING AND INSURANCE

SEMESTER V

IN PARTIAL FULFILMENT OF THE REQUIREMENTS

FOR THE AWARD OF

DEGREE OF BACHELOR OF COMMERCE

BANKING & INSURANCE

BY

MILTON GREGORY MASCARENHAS

SEAT NO -

TOLANI COLLEGE OF COMMERCE,

150-151, SHER-E-PUNJAB SOCIETY,

GURU GOBIND SINGH ROAD,

ANDHERI EAST,

MUMBAI -400093

DECLARATION

I MR. MILTON GREGORY MASCARENHAS THE STUDENT OF B.COM BANKING & INSURANCE

SEMESTER V (2010-2011) HEREBY DECLARE THAT I HAVE COMPLETED THE PROJECT ON

NON PERFORMING ASSETS

THE INFORMATION SUBMITED IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF STUDENT

MILTON GREGORY MASCARENHAS

SEAT NO –

I WOULD LIKE TO THANK THE UNIVERSITY OF MUMBAI, FOR INTRODUCING THE BANKING AND INSURANCE COURSE, HERBY GIVING THE STUDENTS A PLATFORM TO KEEP THE BAREST WITH THE CHANGING SCENARIO, WITH THE HELP OF THEORY AS A BASE & PRACTICAL AS A SOLUTION.

I WOULD LIKE TO EXTEND MY SINCERE THANKS TO PROF. ………………………. AND OTHER FACULTY MEMBERS OF TOLANI COLLEGE, BANKING AND INSURANCE DEPT. IN MAKING THIS PROJECT A REALITY. DEVOID OF THEIR GUIDELINES & SUGGESTIONS, IT WOULD HAVE BY A HAIRS BREATH, FEASIBLE FOR ME TO MOVE ANY FURTHER IN THIS PROJECT.

I WOULD ALSO LIKE TO EXPRESS MY SINCERE GRATITUDE TOWARDS OUR RESPECTED BANKING & INSURANCE CO-ORDINATOR MRS. SADHANA FOR HER KIND HELP AND SUPPPORT.

ACKNOWLEDGEMENT

INTRODUCTION

THE WORLD IS GROWING FASTER IN TERM OF SERVICES AND PHYSICAL PRODUCTS. HOWEVER IT HAS BEEN RESEARCHED THAT MOST OF THE PHYSICAL PRODUCTS COME FROM THE SERVICE SECTOR. IN THE NATION ECONOMY ALSO, SERVICE PLAYS ONE OF THE MAIN AND THE MOST IMPORTANT ROLE IN BOOSTING UP THE ECONOMY. BANKING SECTOR REFORMS IN INDIA HAS PROGRESSED PROMPTLY ON ASPECTS LIKE INTEREST RATE DEREGULATION, REDUCTION IN STATUTORY RESERVE REQUIREMENTS, PRUDENTIAL NORMS FOR INTEREST RATES, ASSET CLASSIFICATION, INCOME RECOGNITION AND PROVISIONING. BUT IT COULD NOT MATCH THE PACE WITH WHICH IT WAS EXPECTED TO DO. THE ACCOMPLISHMENT OF THESE NORMS, AT THE EXECUTION STAGES WITHOUT RESTRUCTURING THE BANKING SECTOR AS SUCH IS CREATING HAVOC.

THE EFFICIENCY OF BANKING IS NOT ALWAYS REFLECTED ONLY BY THE SIZE OF ITS BALANCE SHEET BUT BY THE LEVEL OF RETURN ON ITS ASSETS. NPA’S DO NOT GENERATE INTEREST INCOME FOR THE BANKS, BUT AT THE SAME TIME BANKS ARE REQUIRED TO MAKE PROVISIONS FOR SUCH NPA’S FROM THEIR CURRENT PROFITS.

THE MAIN OF ANY PERSON IS THE UTILIZATION OF MONEY IN THE BEST MANNER SINCE INDIA IS A COUNTRY WHERE MORE THAN HALF OF THE POPULATION HAS A PROBLEM OF RUNNING THE FAMILY IN THE MOST EFFICIENT MANNER. HOWEVER INIDAN PEOPLE FACED LARGE NUMBER OF PROBLEMS TILL THE DEVLOPMENT OF THE FULL-FLEDGED BANKING SECTOR.

THE INIDAN BANKING SECTOR CAME INTO THE DEVELOPING NATURE MOSTLY AFTER THE 1991 GOVERNMENT POLICY. THE BANKING SECTOR HAS REALLY HELPED THE INDIAN PEOPLE TO UTILIZE THE SINGLE MONEY IN THE BEST MANNER AS THEY WANT. PEOPLE NOW HAVE STARTED INVESTING THEIR MONEY IN THE BANKS AND BANKS ALSO PROVIDE GOOD RETURNS ON THE DEPOSITED AMOUNT. THE PEOPLE NOW HAVE AT THEMOST UNDERSTOOD THAT BANKS PROVIDE THEM GOOD SECURITY TO THEIR DEPOSITS AND SO EXCESS AMOUNTS ARE INVESTED IN THE BANKS. THUS, BANKS HAVE HELPED THE PEOPLE TO ACHIEVE THEIR SOCIO ECONOMIC OBJECTIVES.

THE BANKS NOT ONLY ACCEPT THE DEPOSITS OF THE PEOPLE BUT ALSO PROVIDE THEM CREDIT FACILITY FOR THEIR DEVELOPMENT. INDIAN BANKING SECTOR HAS THE NATION IN DEVELOPING THE BUSINESS AND SERVICE SECTORS. BUT RECENTLY THE BANKS ARE FACING THE PROBLEM OF CREDIT RISK. IT IS FOUND THATMANY GENERAL PEOPLE AND BUSINESS PEOPLE BORROW FROM THE BANKS BUT DUE TO SOME GENUINE OR OTHER REASONS IS NOT ABLE TO REPAY BACK THE AMOUNT DRAWN TO THE BANKS.

THE AMOUNT WHICH IS NOT GIVEN BACK TO THE BANKS IS KNOWN AS THE NON PERFORMING ASSETS. MANY BANKS ARE FACING THEPROBLEM OF NON- PERFORMING ASSETS WHICH HAMPERS THE BUSINESS OF THE BANKS. THE BANKING SECTOR PLAYS LARGER ROLE IN CHANNELIZING MONEY FROM ONE END TO OTHER END.IT HELPS ALMOST EVERY PERSON IN UTILIZING THEMONEY AT THEIR BEST. THE BANKING SECTOR ACCEPTS THE DEPOSITS OF THE PEOPLE AND PROVIDES FRUITFULRETURN TO PEOPLE ON THE INVESTED MONEY.

BUT FOR PROVIDING THE BETTER RETURNS PLUS PRINCIPAL AMOUNTS TO THE CLIENTS; IT BECOMES IMPORTANT FOR THE BANKS TO EARN. THE MAIN SOURCE OF INCOME FOR BANKS IS THE INTEREST THAT THEY EARN ON THE LOANS THAT HAVE BEEN DISBURSED TO GENERAL PERSON, BUSINESSMAN, OR ANY INDUSTRY FOR ITS DEVELOPMENT.

THUS, WE MAY FIND THE INPUT-OUTPUT SYSTEM INTHE BANKING SECTOR. BANKS FIRST, ACCEPTS THE DEPOSITS FROM THE PEOPLE AND SECONDLY THEY LEND THISMONEY TO PEOPLE WHO ARE IN THE NEED OF IT. BY THE WAY OF CHANNELIZING MONEY FROM ONE END TOANOTHER END, BANKS EARN THEIR PROFITS.HOWEVER, INDIAN BANKING SECTOR HAS RECENTLY FACED THE SERIOUS PROBLEM OF NON PERFORMINGASSETS.

THIS PROBLEM HAS BEEN EMERGED LARGELY IN INDIAN BANKING SECTOR SINCE THREE DECADE. DUE TO THIS PROBLEM MANY PUBLIC SECTOR BANKS HAVE BEEN ADVERSELY AFFECTED TO THEIR PERFORMANCE AND OPERATIONS. IN SIMPLE WORDS NON PERFORMING ASSETS PROBLEM IS ONE WHERE BANKS ARE NOT ABLE TORECOLLECT THEIR LANDED MONEY FROM THE CLIENTS OR CLIENTS HAVE BEEN IN SUCH A CONDITION THAT THEYARE NOT IN THE POSITION TO PROVIDE THE BORROWED MONEY TO THE BANKS.

THE PROBLEM OF NPAS IS DANGER TO THE BANKS BECAUSE IT DESTROYS THE HEALTHY FINANCIAL CONDITIONS OF THEM. THE TRUST OF THE PEOPLE WOULD NOT BE ANY MORE IF THE BANKS HAVE HIGHER NPAS. SO THE PROBLEM OF NPAS MUST BE TACKLED OUT IN SUCH A WAY THAT WOULD NOT DESTROY THE OPERATIONAL, FINANCIAL CONDITIONS AND WOULDNOT AFFECT THE IMAGE OF THE BANKS. RECENTLY, RBI HAS TAKEN NUMBER STEPS TO REDUCE NPAS OF THEINDIAN BANKS. AND IT IS ALSO FOUND THAT THE MANY BANKS HAVE SHOWN POSITIVE FIGURES IN REDUCING NPAS AS COMPARED TO THE PAST YEARS.

RATIONALE OF THE STUDY

A STRONG BANKING SECTOR IS IMPORTANT FOR FLOURISHING ECONOMY. THE FAILURE OF THE

BANKING SECTOR MAY HAVE AN ADVERSE IMPACT ON OTHER SECTORS. NON-PERFORMING ASSETS ARE

ONE OF THE MAJOR CONCERNS FOR BANKS IN INDIA.

NPAS REFLECT THE PERFORMANCE OF BANKS. A HIGH LEVEL OF NPAS SUGGESTS HIGH PROBABILITY OF

A LARGENUMBER OF CREDIT DEFAULTS THAT AFFECT THE PROFITABILITY AND NET-WORTH OF BANKS

AND ALSO ERODES THEVALUE OF THE ASSET. THE NPA GROWTH INVOLVES THE NECESSITY OF

PROVISIONS, WHICH REDUCES THE OVERALL PROFITS AND SHAREHOLDERS VALUE.THE ISSUE OF NON

PERFORMING ASSETS HAS BEEN DISCUSSED AT LENGTH FOR FINANCIAL SYSTEM ALL OVER THE

WORLD. THE PROBLEM OF NPAS IS NOT ONLY AFFECTING THE BANKS BUT ALSO THE WHOLE ECONOMY.

INFACT HIGH LEVEL OF NPAS IN INDIAN BANKS IS NOTHING BUT A REFLECTION OF THE STATE OF

HEALTH OF THE INDUSTRY AND TRADE.

THE MAIN AIM BEHIND MAKING THIS REPORT IS TO KNOW HOW PUBLIC SECTOR BANKS ARE

OPERATING THEIRBUSINESS AND HOW NPAS PLAY ITS ROLE TO THE OPERATIONS OF THE PUBLIC

SECTOR BANKS. THE REPORTNPAS ARE CLASSIFIED ACCORDING TO THE SECTOR, INDUSTRY, AND STATE

WISE. THE PRESENT STUDY ALSOFOCUSES ON THE EXISTING SYSTEM IN INDIA TO SOLVE THE PROBLEM

OF NPAS AND COMPARATIVE ANALYSIS TOUNDERSTAND WHICH BANK IS PLAYING WHAT ROLE WITH

CONCERNED TO NPAS. THUS, THE STUDY WOULD HELP THE DECISION MAKERS TO UNDERSTAND THE

FINANCIAL PERFORMANCE AND GROWTH OF PUBLIC SECTOR BANKSAS COMPARED TO THE NPAS.

THAT’S WHY THE STUDY OF NPA’SBECOME NECESSARY DUE TO THE ABOVE MENTIONED REASONS :

THEY ERODE CURRENT PROFITS THROUGH PROVISIONING REQUIREMENTS.

THEY RESULT IN REDUCED INTEREST INCOME.

THEY REQUIRE HIGHER PROVISIONING REQUIREMENTS AFFECTING PROFITS AND ACCRETION TO

CAPITAL

FUNDS AND CAPACITY TO INCREASE GOOD QUALITY RISK ASSETS IN FUTURE, AND

THEY LIMIT RECYCLING OF FUNDS, SET IN ASSET-LIABILITY MISMATCHES, ETC

ABOUT NON PERFORMING ASSETS

AN ASSET IS CLASSIFIED AS NON-PERFORMING ASSET (NPA) IF DUE IN THE FORM OF PRINCIPAL AND

INTEREST ARE NOT PAID BY THE BORROWER FOR A PERIOD OF 90 DAYS.IF ANY ADVANCE OR CREDIT

FACILITIES GRANTED BY BANKS TO A BORROWER BECOMES NON-PERFORMING, THEN THE BANK WILL

HAVE TO TREAT ALL THE ADVANCES/CREDIT FACILITIES GRANTED TO THAT BORROWER AS NON-

PERFORMING WITHOUT HAVINGANY REGARD TO THE FACT THAT THERE MAY STILL EXIST CERTAIN

ADVANCES / CREDIT FACILITIES HAVING PERFORMING STATUS.

THOUGH THE TERM NPA CONNOTES A FINANCIAL ASSET OF A COMMERCIAL BANK, WHICH HAS

STOPPED EARNING AN EXPECTED REASONABLE RETURN, IT IS ALSO A REFLECTION OF THE

PRODUCTIVITY OF THE UNIT, FIRM, CONCERN, INDUSTRY AND NATION WHERE THAT ASSET IS IDLING.

VIEWED WITH THIS PERSPECTIVE, THE NPA ISA RESULT OF AN ENVIRONMENT THAT PREVENTS IT FROM

PERFORMING UP TO EXPECTED LEVELS.

THE DEFINITION OF NPAS IN INDIAN CONTEXT IS CERTAINLY MORE LIBERAL WITH TWO QUARTERS

NORM BEINGAPPLIED FOR CLASSIFICATION OF SUCH ASSETS. THE RBI IS MOVING OVER TO ONE-

QUARTER NORM FROM 2004 ONWARDS.

NPAS –MEANING:

•A NPA IS A LOAN OR AN ADVANCE WHERE INTEREST AND/ OR INSTALLMENT OF PRINCIPAL REMAIN

OVERDUE FOR A PERIOD OF MORE THAN 90 DAYS IN RESPECT OF A TERM LOAN,

•THE DEBT REMAINS OUTSTANDING FOR 90 CONSECUTIVE DAYS OR MORE BEYOND THE SCHEDULED

PAYMENT DATE OR MATURITY.

•THE DEBT EXCEEDS THE BORROWER’S APPROVED LIMIT FOR 90 CONSECUTIVE DAYS OR MORE.

•INTEREST IS DUE AND UNCOLLECTED FOR 90 DAYS OR MORE OR

•FOR OVERDRAFTS, THE ACCOUNT HAS BEEN INACTIVE FOR 90 CONSECUTIVE DAYS AND / OR DEPOSITS

ARE INSUFFICIENT TO COVER THE INTEREST CAPITALIZED DURING THE PERIOD.

CLASSIFICATION OF NPA

ONCE AN ASSET FALLS UNDER THE NPA CATEGORY, BANKS ARE REQUIRED BY THE RESERVE BANK OF

INDIA (RBI) TO MAKE PROVISION FOR THE UNCOLLECTED INTEREST ON THESE ASSETS. FOR THE

PURPOSE THEY HAVE TOCLASSIFY THEIR ASSETS BASED ON THE STRENGTH AND ON COLLATERAL

SECURITIES INTO:

1. SUBSTANDARD ASSETS - WHICH HAS REMAINED NPA FOR A PERIOD LESS THAN OR EQUAL TO 12

MONTHS.

THIS IS NOT A NON-PERFORMING ASSET. IT DOES NOT CARRY MORE THAN NORMAL RISK

ATTACHED TO THE

BUSINESS.

2. DOUBTFUL ASSETS -

WHICH HAS REMAINED IN THE SUB-STANDARD CATEGORY FOR A PERIOD OF 12 MONTHS.

3. LOSS ASSETS

WHERE LOSS HAS BEEN IDENTIFIED BY THE BANK OR INTERNAL OR EXTERNAL AUDITORSOR THE RBI

INSPECTION BUT THE AMOUNT HAS NOT BEEN WRITTEN OFF WHOLLY.

IT IS AN ASSET IDENTIFIED BY THE BANK, AUDITORS OR BY THE RBI INSPECTION AS A LOSS ASSET.

IT IS AN ASSET FOR WHICH NO SECURITY IS AVAILABLE OR THERE IS CONSIDERABLE EROSION IN THEREALIZABLE VALUE OF THE SECURITY

DIFFICULTIES WITH THE NON PERFORMING ASSETS

1.) OWNERS DO NOT RECEIVE A MARKET RETURN ON THEIR CAPITAL. IN THE WORST CASE, IF THE BANK FAILS, OWNERS LOSE THEIR ASSETS. IN MODERN TIMES, THIS MAY AFFECT A BROAD POOL OF SHAREHOLDERS.

2.) DEPOSITORS DO NOT RECEIVE A MARKET RETURN ON SAVINGS. IN THE WORST CASE IF THE BANK

FAILS, DEPOSITORS LOSE THEIR ASSETS OR UNINSURED BALANCE. BANKS ALSO REDISTRIBUTE LOSSES

TO OTHER BORROWERS BY CHARGING HIGHER INTEREST RATES .LOWER DEPOSIT RATES AND HIGHER

LENDING RATES REPRESS SAVINGS AND FINANCIAL MARKETS , WHICH HAMPERS ECONOMIC GROWTH.

3.) NON PERFORMING LOANS REPRESENT BAD INVESTMENTS. NPA MISALLOCATE CREDIT FROM GOOD

PROJECTS, WHICH DO NOT RECEIVE FUNDING, TO FAILED PROJECTS. BAD INVESTMENT END UP IN

MISALLOCATION OF CAPITAL AND, BY EXTENSION, LABOUR AND NATURAL RESOURCES. THE ECONOMY

PERFORMS BELOW ITSPRODUCTION POTENTIAL.

4.) NON PERFORMING LOANS MAY SPILL OVER THE BANKING SYSTEM AND CONTRACT THE MONEY STOCK, WHICH MAY LEAD TO ECONOMIC CONTACTION.THIS SPILLOVER EFFECT CAN CHANNELISE THROUGH ILLIQUIDITY OR BANK INSOLVENCY;

(A)WHEN MANY BORROWERS FAIL TO PAY INTEREST, BANKS MAY EXPERIENCE LIQUIDITY SHORTAGES THESE SHORTAGES CAN JAM PAYMENTS ACROSS THE COUNTRY.

(B) ILLIQUIDITY CONSTRAINTS BANK IN PAYING DEPOSITORS EG. CASHING THEIR PAYCHECKS.BANKING PANIC FOLLOWS. A RUN ON BANK BY DEPOSITORS AS PART OF THE NATIONAL MONEY STOCK BECOMES INOPERATIVE. THE MONEY STOCK CONTRACTS AND ECONOMIC CONTRACTION FOLLOWS.

(C) UNDERCAPITALISED BANKS EXCEEDS THE BANKS CAPITAL BASE.

GUIDELINES FOR THE CLASSIFICATION OF ASSETS

1) CLASSIFICATION OF ASSETS INTO ABOVE CATEGORIES SHOULD BE DONE TAKING INTO ACCOUNT THE

DEGREE OF WELL DEFINED CREDIT WEAKNESSES AND THE EXTENT OF DEPENDENCIES ON COLLATERAL

SECURITY FOR THE REALIZATION OF DUES.

2.) BANKS SHOULD ESTABLISH APPROPRIATE INTERNAL SYSTEMS TO ELIMINATE THE TENDENCY TO DELAY OR POSTPONE THE IDENTIFICATION OF NPA’S ESPECIALLY IN RESPECT OF HIGH VALUE OF ACCOUNTS.

3.) ACCOUNT WITH TEMPORARY DEFICIENCIES:

THE CLASSIFICATION OF AN ASSET AS NPA SHOULD BE BASED ON THE RECORD OF RECOVERY .BANK

SHOULD NOT CLASSIFY AN ADVANCE ACCOUNT AS NPA MERELY DUE TO THE EXISTENCE OF SOME

DEFICIENCIES, WHICH ARE TEMPORARY IN NATURE AS SUCH AS NON – AVAILABILITY OF ADEQUATE

DRAWING POWER BASED ON LATEST STOCK.

4.) ASSET CLASSIFICATION TO BE BORROWER – WISE AND NOT FACILITY-WISE:

IT IS DIFFICULT TO ENVISAGE A SITUATION WHEN ONLY ONE FACILITY TO A BORROWER BECOMES A

PROBLEM CREDIT AND NOT OTHERS. THEREFORE, ALL THE FACILITIES GRANTED BY A BANK TO A

BORROWER WILL HAVE TO BE TREATED AS NPA AND NOT THE PARTICULAR FACILITY OR A PART

THEREOF, WHICH HAS BECOME IRREGULAR.

5.) ADVANCES UNDER CONSORTIUM ARRANGEMENTS:ASSET CLASSIFIED OF ACCOUNTS UNDER CONSORTIUM SHOULD BE BASED ON THE RECORD OF RECOVERY OF THE INDIVIDUAL MEMBER BANKS AND OTHER ASPECTS HAVING BEARING ON THE RECOVERABILITY OF THE ADVANCES.

6.) ACCOUNTS WHERE THERE IS EROSION IN THE VALUE OF SECURITY CAN BE RECKONED AS

SIGNIFICANT WHEN THE REALISABLE VALUE OF THE SECURITY IS LESS THAN 50 PERCENT OF THE VALUE

ASSESSED BY THE BANK OR ACCEPTED BY RBI AT THE TIME OF LAST INSPECTION, AS THE CASE MAY BE.

7.) AGRICULTURAL ADVANCES

(A.) IN RESPECT OF ADVANCES GRANTED FOR AGRICULTURAL PURPOSE PURPOSE WHERE INTEREST

AND / OR INSTALLMENT OF PRINCIPAL REMAINS UNPAID AFTER IT HAS BECOME PAST DUE FOR TWO

HARVEST SEASONS BUT FOR A PERIOD NOT EXCEEDING TWO HALF YEARS, SUCH AN ADVANCE SHOULD

BE TREATED AS NPA.

(B.) WHERE THE NATURAL CALAMITIES IMPAIR THE REPAYING CAPACITY OF AGRICULTURAL

BORROWERS, BANKS MAY DECIDE ON THEIR OWN AS A RELIEF MEASURE-CONVERSION OF THE SHORT –

TERM PRODUCTION LOAN INTO A TERM OR RE-SCHEDULEMENT OF THE REPAYMENT PERIOD.

(C.) IN SUCH CASES OF CONVERSATION OR RE-SCHEDULEMENT, THE TERM LOAN AS WELL AS FRESH SHORT-TERM LOAN MAY BE TREATED AS CURRENT DUES AND NEED NOT BE CLASSIFIED AS NPA.

8.) RESTRUCTURING /RESCHEDULING OF LOANS:

A STANDARD ASSET WHERE THE TERMS OF THE LOAN ARRANGEMENT REGARDING INTEREST AND

PRINCIPAL HAVE BEEN RENEGOTIATED OR RESCHEDULED AFTER THE COMMENCEMENT OF

PRODUCTION SHOULD BE AS SUB-STANDARD AND SHOULD REMAIN IN SUCH CATEGORY FOR AT LEAST

ONE YEAR OF SATISFACTORY PERFORMANCE UNDER THE RENEGOTIATED OR RESTRUCTURED TERMS. IN

CASE OF SUBSTANDARD AND DOUBTFUL ASSETS ALSO, RESCHEDULING DOES NOT ENTITLE A BANK TO

UPGRADE THE QUALITY OF ADVANCES AUTOMATICALLY UNLESS THERE IS SATISFACTORY

PERFORMANCE UNDER THE RESCHEDULED –RENEGOTIATED TERMS.

9.) EXCEPTIONS:

AS TRADING INVOLVES ONLY BUYING AND SELLING OF COMMODITIES AND THE PROBLEMS ASSOCIATED

WITH MANUFACTURING UNITS SUCH AS BOTTLENECK IN COMMERCIAL PRODUCTION , TIME AND COST

ESCALATION,ETC.ARE NOT APPLICABLE TO THEM , THESE. GUIDELINES TO TRADERS.

SEVERAL GENERAL REASONS FOR AN ACCOUNT BECOMING NPA

* INTERNAL FACTORS

* EXTERNAL FACTORS

INTERNAL FACTORS:

1. FUNDS BORROWED FOR A PARTICULAR PURPOSE BUT NOT USE FOR THE SAID PURPOSE.

2. PROJECT NOT COMPLETED IN TIME.

3. POOR RECOVERY OF RECEIVABLES.

4. EXCESS CAPACITIES CREATED ON NON-ECONOMIC COSTS.

5. IN-ABILITY OF THE CORPORATE TO RAISE CAPITAL THROUGH THE ISSUE OF EQUITY OR OTHER DEBT

INSTRUMENTFROM CAPITAL MARKETS.

6. BUSINESS FAILURES.

7. DIVERSION OF FUNDS FOR EXPANSION\MODERNIZATION\SETTING UP NEW PROJECTS\ HELPING OR

PROMOTING SISTER CONCERNS.

8. WILLFUL DEFAULTS, SIPHONING OF FUNDS, FRAUD, DISPUTES, MANAGEMENT DISPUTES, MIS-

APPROPRIATION ETC.,

9. DEFICIENCIES ON THE PART OF THE BANKS VIZ. IN CREDIT APPRAISAL, MONITORING AND FOLLOW-

UPS, DELAY IN SETTLEMENT OF PAYMENTS\ SUBSIDIARIES BY GOVERNMENT BODIES ETC.,

EXTERNAL FACTORS:

1. SLUGGISH LEGAL SYSTEM -

•LONG LEGAL TANGLES

•CHANGES THAT HAD TAKEN PLACE IN LABOUR LAWS

•LACK OF SINCERE EFFORT.

2. SCARCITY OF RAW MATERIAL, POWER AND OTHER RESOURCES.

3. INDUSTRIAL RECESSION

4. SHORTAGE OF RAW MATERIAL, RAW MATERIAL\INPUT PRICE ESCALATION, POWER SHORTAGE, INDUSTRIAL RECESSION, EXCESS CAPACITY, NATURAL CALAMITIES LIKE FLOODS, ACCIDENTS.

5. FAILURES, NON PAYMENT\ OVER DUES IN OTHER COUNTRIES, RECESSION IN OTHER COUNTRIES,EXTERNALIZATION PROBLEMS, ADVERSE EXCHANGE RATES ETC.

6. GOVERNMENT POLICIES LIKE EXCISE DUTY CHANGES, IMPORT DUTY CHANGES ETC.,

OTHER CAUSES

A) FAILURE TO BRING IN REQUIRED CAPITALB) TOO AMBITIOUS PROJECTD) UNWANTED EXPENSESE) OVER TRADINGF) IMBALANCES OF INVENTORIESG) LACK OF PROPER PLANNINGH) DEPENDENCE ON SINGLE CUSTOMERSI) LACK OF EXPERTISEJ) IMPROPER WORKING CAPITAL MGMT.K) MIS MANAGEMENTL) DIVERSION OF FUNDSM) POOR QUALITY MANAGEMENTN) HEAVY BORROWINGS

UNDERLYING REASONS FOR NPA’S IN INDIA

AN INTERNAL STUDY CONDUCTED BY RBI SHOWS THAT IN THE ORDER OF PROMINENCE, THE

FOLLOWING

FACTORS CONTRIBUTE TO NPA’S

INTERNAL FACTORS

DIVERSION OF FUNDS FOR

EXPANSION/DIVERSIFICATION/MODERNIZATION

TAKING UP NEW PROJECTS

HELPING/PROMOTING ASSOCIATE CONCERNS TIME/COST OVERRUN DURING THE PROJECT

IMPLEMENTATION STAGE

BUSINESS (PRODUCT, MARKETING, ETC.) FAILURE

INEFFICIENCY IN MANAGEMENT

SLACKNESS IN CREDIT MANAGEMENT AND MONITORING

INAPPROPRIATE TECHNOLOGY/TECHNICAL PROBLEMS

LACK OF CO-ORDINATION AMONG LENDERS

EXTERNAL FACTORS

RECESSION INPUT/POWER SHORTAGE PRICE ESCALATION EXCHANGE RATE FLUCTUATION ACCIDENTS AND NATURAL CALAMITIES, ETC. CHANGES IN GOVERNMENT POLICIES IN EXCISE/ IMPORT DUTIES, POLLUTION CONTROL ORDERS, ETC.

AS MENTIONED EARLIER, WE HELD DISCUSSIONS WITH LENDERS AND FINANCIAL SECTOR EXPERTS ON

THE CAUSES OF NPAS IN INDIA AND WHILST THE ABOVE-MENTIONED CAUSES WERE REAFFIRMED,

SOME OTHERSWERE ALSO MENTIONED. A BRIEF DISCUSSION IS PROVIDED ON THE NEXT PAGE

• LIBERALIZATION OF ECONOMY/REMOVAL OF RESTRICTIONS/REDUCTION OF TARIFFS

A LARGE NUMBER OF NPA BORROWERS WERE UNABLE TO COMPETE IN A COMPETITIVE MARKET IN

WHICH LOWER PRICES AND GREATER CHOICES WERE AVAILABLE TO CONSUMERS. FURTHER,

BORROWERS OPERATING IN SPECIFIC INDUSTRIES HAVE SUFFERED DUE TO POLITICAL, FISCAL AND

SOCIAL COMPULSIONS, COMPOUNDING PRESSURES FROM LIBERALIZATION (E.G., SUGAR AND

FERTILIZER INDUSTRIES)

•TAX MONITORING OF CREDITS AND FAILURE TO RECOGNIZE EARLY WARNING SIGNALS

IT HAS BEEN STATED THAT APPROVAL OF LOAN PROPOSALS IS GENERALLY THOROUGH AND EACH

PROPOSAL PASSES THROUGH MANY LEVELS BEFORE APPROVAL IS GRANTED. HOWEVER, THE

MONITORING OF SOMETIMES-COMPLEX CREDIT FILES HAS NOT RECEIVED THE ATTENTION IT NEEDED,

WHICH MEANT THAT EARLY WARNING SIGNALS WERE NOT RECOGNIZED AND STANDARD ASSETS

SLIPPED TO NPA CATEGORY WITHOUT BANKS BEING ABLE TO TAKE PROACTIVE MEASURES TO PREVENT

THIS. PARTLY DUE TO THIS REASON, ADVERSE TRENDS IN BORROWERS' PERFORMANCE WERE NOT

NOTED AND THE POSITION FURTHER DETERIORATED BEFORE ACTION WAS TAKEN.

• OVER OPTIMISTIC PROMOTERS

PROMOTERS WERE OFTEN OPTIMISTIC IN SETTING UP LARGE PROJECTS AND IN SOME CASES WERE NOT

FULLYABOVE BOARD IN THEIR INTENTIONS. SCREENING PROCEDURES DID NOT ALWAYS HIGHLIGHT

THESE ISSUES.OFTEN PROJECTS WERE SET UP WITH THE EXPECTATION THAT PART OF THE FUNDING

WOULD BE ARRANGEDFROM THE CAPITAL MARKETS, WHICH WERE BOOMING AT THE TIME OF THE

PROJECT APPRAISAL. WHEN THECAPITAL MARKETS SUBSEQUENTLY CRASHED, THE REQUISITE FUNDS

COULD NEVER BE RAISED, PROMOTERSOFTEN LOST INTEREST AND LENDERS WERE LEFT STRANDED

WITH INCOMPLETE/UNVIABLE PROJECTS.

• DIRECTED LENDINGLOANS TO SOME SEGMENTS WERE DICTATED BY GOVERNMENT'S POLICIES RATHER THAN COMMERCIALIMPERATIVES.

• HIGHLY LEVERAGED BORROWERS

SOME BORROWERS WERE UNDERCAPITALIZED AND OVER BURDENED WITH DEBT TO ABSORB THE

CHANGING ECONOMIC SITUATION IN THE COUNTRY. OPERATING WITHIN A PROTECTED MARKET

RESULTED IN LOW APPRECIATION OF COMMERCIAL/MARKET RISK.

• FUNDING MISMATCHTHERE ARE SAID TO BE MANY CASES WHERE LOANS GRANTED FOR SHORT TERMS WERE USED TO FUND LONG TERM TRANSACTIONS.

• HIGH COST OF FUNDSINTEREST RATES AS HIGH AS 20% WAS NOT UNCOMMON. COUPLED WITH HIGH LEVERAGING AND FALLING DEMAND, BORROWERS COULD NOT CONTINUE TO SERVICE HIGH COST DEBT.

• WILLFUL DEFAULTERSTHERE ARE A NUMBER OF BORROWERS WHO HAVE STRATEGICALLY DEFAULTED ON THEIR DEBT SERVICEOBLIGATIONS REALIZING THAT THE LEGAL RECOURSE AVAILABLE TO CREDITORS IS SLOW IN ACHIEVING RESULTS

PROCEDURE FOR NPA IDENTIFICATION AND RESOLUTION IN INDIA

1. INTERNAL CHECKS AND CONTROL

SINCE HIGH LEVEL OF NPAS DAMPENS THE PERFORMANCE OF THE BANKS IDENTIFICATION OF

POTENTIAL PROBLEM ACCOUNTS AND THEIR CLOSE MONITORING ASSUMES IMPORTANCE.THOUGH

MOST BANKS HAVE EARLY WARNING SYSTEMS (EWS) FOR IDENTIFICATION OF POTENTIAL NPAS, THE

ACTUAL PROCESSES FOLLOWED, HOWEVER, DIFFER FROM BANK TO BANK. THE EWS ENABLE A BANK TO

IDENTIFY THE BORROWER ACCOUNTS WHICH SHOW SIGNS OF CREDIT DETERIORATION AND INITIATE

REMEDIAL ACTION. MANY BANKS HAVE EVOLVED AND ADOPTED AN ELABORATE EWS, WHICH ALLOWS

THEM TO IDENTIFY POTENTIAL DISTRESS SIGNALS AND PLAN THEIR OPTIONS BEFORE HAND,

ACCORDINGLY. THE EARLY WARNING SIGNALS, INDICATIVEOF POTENTIAL PROBLEMS IN THE ACCOUNTS,

VIZ. PERSISTENT IRREGULARITY IN ACCOUNTS, DELAYS INSERVICING OF INTEREST, FREQUENT

DEVOLVEMENT OF L/CS, UNITS' FINANCIAL PROBLEMS, MARKET RELATED PROBLEMS, ETCARE

CAPTURED BY THE SYSTEM. IN ADDITION, SOME OF THESE BANKS ARE REVIEWING THEIREXPOSURE TO

BORROWER ACCOUNTS EVERY QUARTER BASED ON PUBLISHED DATA WHICH ALSO SERVES AS AN

IMPORTANT ADDITIONAL WARNING SYSTEM. THESE EARLY WARNING SIGNALS USED BY BANKS ARE

GENERALLY INDEPENDENT OF RISK RATING SYSTEMS AND ASSET CLASSIFICATION NORMS PRESCRIBED

BY RBI.

THE MAJOR COMPONENTS/PROCESSES OF A EWS FOLLOWED BY BANKS IN INDIA AS BROUGHT OUT BY

ASTUDY CONDUCTED BY RESERVE BANK OF INDIA AT THE INSTANCE OF THE BOARD OF

FINANCIALSUPERVISION ARE AS FOLLOWS:

DESIGNATING RELATIONSHIP MANAGER/ CREDIT OFFICER FOR MONITORING ACCOUNT/S

PREPARATION OF `KNOW YOUR CLIENT' PROFILE

CREDIT RATING SYSTEM

IDENTIFICATION OF WATCH-LIST/SPECIAL MENTION CATEGORY ACCOUNTS

MONITORING OF EARLY WARNING SIGNALS

RELATIONSHIP MANAGER/CREDIT OFFICER

THE RELATIONSHIP MANAGER/CREDIT OFFICER IS AN OFFICIAL WHO IS EXPECTED TO HAVE COMPLETE

KNOWLEDGE OF BORROWER, HIS BUSINESS, HIS FUTURE PLANS, ETC. THE RELATIONSHIP MANAGER

HAS TO KEEP IN CONSTANT TOUCH WITH THE BORROWER AND REPORT ALL DEVELOPMENTS

IMPACTING THE BORROWABLE ACCOUNT. AS A PART OF THIS CONTACT HE IS ALSO EXPECTED TO

CONDUCT SCRUTINY AND ACTIVITY INSPECTIONS. IN THE CREDIT MONITORING PROCESS, THE

RESPONSIBILITY OF MONITORING ACORPORATE ACCOUNT IS VESTED WITH RELATIONSHIP

MANAGER/CREDIT OFFICER.

KNOW YOUR CLIENT' PROFILE (KYC)

MOST BANKS IN INDIA HAVE A SYSTEM OF PREPARING `KNOW YOUR CLIENT' (KYC)

PROFILE/CREDITREPORT. AS A PART OF `KYC' SYSTEM, VISITS ARE MADE ON CLIENTS AND THEIR PLACES

OF BUSINESS/UNITS.THE FREQUENCY OF SUCH VISITS DEPENDS ON THE NATURE AND NEEDS OF

RELATIONSHIP

CREDIT RATING SYSTEM

THE CREDIT RATING SYSTEM IS ESSENTIALLY ONE POINT INDICATOR OF AN INDIVIDUAL CREDIT

EXPOSURE ANDIS USED TO IDENTIFY MEASURE AND MONITOR THE CREDIT RISK OF INDIVIDUAL

PROPOSAL. AT THE WHOLE BANK LEVEL, CREDIT RATING SYSTEM ENABLES TRACKING THE HEALTH OF

BANKS ENTIRE CREDIT PORTFOLIO.MOST BANKS IN INDIA HAVE PUT IN PLACE THE SYSTEM OF INTERNAL

CREDIT RATING. WHILE MOST OF THE BANKS HAVE DEVELOPED THEIR OWN MODELS, A FEW BANKS

HAVE ADOPTED CREDIT RATING MODELS DESIGNED BY RATING AGENCIES. CREDIT RATING MODELS

TAKE INTO ACCOUNT VARIOUS TYPES OF RISKS VIZ.FINANCIAL, INDUSTRY AND MANAGEMENT, ETC.

ASSOCIATED WITH A BORROWABLE UNIT. THE EXERCISE IS GENERALLY DONE AT THE TIME OF

SANCTION OF NEW BORROWABLE ACCOUNT AND AT THE TIME OF REVIEW /RENEWAL OF EXISTING

CREDIT FACILITIES.

FINANCIAL RELATED WARNING SIGNALS GENERALLY EMANATE FROM THE BORROWERS' BALANCE SHEET, INCOME EXPENDITURE STATEMENT, STATEMENT OF CASH FLOWS, STATEMENT OF RECEIVABLES ETC.FOLLOWING COMMON WARNING SIGNALS ARE CAPTURED BY SOME OF THE BANKS HAVING RELATIVELY DEVELOPED EWS.FINANCIAL WARNING SIGNALS

PERSISTENT IRREGULARITY IN THE ACCOUNT

DEFAULT IN REPAYMENT OBLIGATION

DEVOLVEMENT OF LC/INVOCATION OF GUARANTEES

DETERIORATION IN LIQUIDITY/WORKING CAPITAL POSITION

SUBSTANTIAL INCREASE IN LONG TERM DEBTS IN RELATION TO EQUITY

DECLINING SALES

OPERATING LOSSES/NET LOSSES

RISING SALES AND FALLING PROFITS

DISPROPORTIONATE INCREASE IN OVERHEADS RELATIVE TO SALES

RISING LEVEL OF BAD DEBT LOSSES OPERATIONAL WARNING SIGNALS

LOW ACTIVITY LEVEL IN PLANT

DISORDERLY DIVERSIFICATION/FREQUENT CHANGES IN PLAN

NONPAYMENT OF WAGES/POWER BILLS

IMPACT OF NPAS ON BANKING OPERATIONS

•BANKS PROFITABILITY IS AFFECTED ADVERSELY BECAUSE OF THE PROVIDING OF DOUBTFUL DEBTS ANDCONSEQUENT TO WRITING IT OFF AS BAD DEBTS.

•RETURN ON INVESTMENTS (ROI) IS REDUCED.

•THE CAPITAL ADEQUACY RATIO IS DISTURBED AS NPAS ARE ENTERING INTO ITS CALCULATION.

•THE COST OF CAPITAL WILL GO UP.

•THE ASSETS AND LIABILITY MISMATCH WILL WIDEN.

•THE ECONOMIC VALUE ADDITION (EVA) BY BANKS GETS UPSET BECAUSE EVA IS EQUAL TO THE NET OPERATING PROFIT MINUS COST OF CAPITAL AND C IT LIMITS RECYCLING OF THE FUNDS.

IT IS DUE TO ABOVE FACTORS THE PUBLIC SECTOR BANKS ARE FACED WITH BULGING NPAS WHICH RESULTS IN LOWER INCOME AND HIGHER PROVISIONING FOR DOUBTFUL DEBTS AND IT WILL MAKE A DENT IN THEIR PROFITMARGIN. IN THIS CONTEXT OF CRIPPLING EFFECT ON BANKS OPERATION THE SLEW ASSET QUALITY IS PLACED AS ONE OF THE MOST IMPORTANT PARAMETERS IN THE MEASUREMENT OF BANKS PERFORMANCE UNDER THE CAMEL’S SUPERVISORY RATING SYSTEM OF RBI.CREDIT RISKS OF NPAS: THE MOST OF THE PUBLIC SECTOR BANKS ARE INCAPABLE OF VISUALIZING THE RISK.THEY ARE GOING TO FACE IN THE EMERGING GLOBAL ECONOMIC SCENARIO. THE RISK MANAGEMENT MACHINERY ADOPTED REQUIRES A COMPREHENSIVE OVERHAUL OF THE SYSTEM BY THE BANKS IN THIS CHANGING CONDITION. THE SECOND CONSULTATIVE DOCUMENT ON THE NEW BASLE CAPITAL ACCORD ON BANKING SUPERVISION HAS GIVEN A STRESS ON THE RISK MANAGEMENT ASPECT OF THE BANKS BYINTRODUCING A MORE RISK SENSITIVE STANDARDIZED APPROACH TOWARDS CAPITAL ADEQUACY. IN SPITE OF THE STRINGENT RECOMMENDATIONS AND RBIS APPREHENSIONS OF THE ADEQUATE PREPAREDNESS OF THE BANKING SECTOR IN ADOPTING INSTRUCTIONS, IT IS QUITE CLEAR ABOUT THE WILLINGNESS OF THE BANKS TO VIGOROUSLY PURSUE EFFECTIVE CREDIT RISK MANAGEMENT MECHANISM BY VISUALIZING THE MAGNITUDE OF CREDIT RISK MANAGEMENT TO CURTAIL THE GROWTH OF MOUNTING NPAS.

MEASURES TO CONTROL NPAS MENACE IT IS PROVED BEYOND DOUBT THAT NPAS IN BANK OUGHT TO BE KEPT AT THE LOWEST LEVEL. TWO PRONGED APPROACHES VIZ.,

1. PREVENTIVE MANAGEMENT

2. CURATIVE MANAGEMENT

PREVENTIVE MANAGEMENT:

CREDIT ASSESSMENT AND RISK MANAGEMENT MECHANISM: A LASTING SOLUTION TO THE PROBLEM OF NPAS CAN BE ACHIEVED ONLY WITH PROPER CREDIT ASSESSMENT AND RISK MANAGEMENT MECHANISM. THE DOCUMENTATION OF CREDIT POLICY AND CREDIT AUDIT IMMEDIATELY AFTER THE SANCTION IS NECESSARY TO UPGRADE THE QUALITY OF CREDIT APPRAISAL IN BANKS. IN A SITUATION OF LIQUIDITY OVERHANG THE ENTHUSIASM OF THE BANKING SYSTEM IS TO INCREASE LENDING WITH COMPROMISE ON ASSET QUALITY, RAISING CONCERN ABOUT ADVERSE SELECTION AND POTENTIAL DANGER OF ADDITION TO THE NPAS STOCK. IT IS NECESSARY THAT THE BANKING SYSTEM IS EQUIPPED WITH PRUDENTIAL NORMS TO MINIMIZE IF NOT COMPLETELY AVOID THE PROBLEM OF CREDIT RISK.

REDUCE DEPENDENCE ON INTEREST: THE INDIAN BANKS ARE LARGELY DEPENDING UPON LENDING AND INVESTMENTS. THE BANKS IN THE DEVELOPED COUNTRIES DO NOT DEPEND UPON THIS INCOME WHEREAS 86PERCENT OF INCOME OF INDIAN BANKS IS ACCOUNTED FROM INTEREST AND THE REST OF THE INCOME IS FEEBASED. THE BANKER CAN EARN SUFFICIENT NET MARGIN BY INVESTING IN SAFER SECURITIES THOUGH NOT AT HIGH RATE OF INTEREST. IT FACILITATES FOR LIMITING OF HIGH LEVEL OF NPAS GRADUALLY. IT IS POSSIBLE THAT AVERAGE YIELD ON LOANS AND ADVANCES NET DEFAULT PROVISIONS AND SERVICES COSTS DO NOT EXCEED THE AVERAGE YIELD ON SAFETY SECURITIES BECAUSE OF THE ABSENCE OF RISK AND SERVICE COST.

POTENTIAL AND BORDERLINE NPAS UNDER CHECK: THE POTENTIAL AND BORDERLINE ACCOUNTS REQUIRE QUICK DIAGNOSIS AND REMEDIAL MEASURES SO THAT THEY DO NOT STEP INTO NPAS CATEGORIES. THE AUDITORS OF THE BANKING COMPANIES MUST MONITOR ALL OUTSTANDING ACCOUNTS IN RESPECT OF ACCOUNTS ENJOYING CREDIT LIMITS BEYOND CUTOFF POINTS, SO THAT NEW SUB-STANDARD ASSETS CAN BE KEPT UNDER CHECK.

CURATIVE MANAGEMENT: THE CURATIVE MEASURES ARE DESIGNED TO MAXIMIZE RECOVERIES SO THAT BANKS FUNDS LOCKED UP IN NPAS ARE RELEASED FOR RECYCLING. THE CENTRAL GOVERNMENT AND RBI HAVE TAKEN STEPS FOR ARRESTING INCIDENCE OF FRESH NPAS AND CREATING LEGAL AND REGULATORY ENVIRONMENT TO FACILITATE THE RECOVERY OF EXISTING NPAS OF BANKS. THEY ARE:

DEBT RECOVERY TRIBUNALS (DRT): IN ORDER TO EXPEDITE SPEEDY DISPOSAL OF HIGH VALUE CLAIMS OF BANKS DEBT RECOVERY TRIBUNALS WERE SETUP. THE CENTRAL GOVERNMENT HAS AMENDED THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT IN JANUARY 2000 FOR ENHANCING THE EFFECTIVENESS OF DRTS. THE PROVISIONS FOR PLACEMENT OF MORE THAN ONE RECOVERY OFFICER, POWER TO ATTACH DEPENDENTS PROPERTY BEFORE JUDGMENT, PENAL PROVISION FOR DISOBEDIENCE OF TRIBUNALS ORDER AND APPOINTMENT OF RECEIVER WITH POWERS OF REALISATION, MANAGEMENT, PROTECTION AND PRESERVATION OF PROPERTY ARE EXPECTED TO PROVIDE NECESSARY TEETH TO THE DRTS AND SPEED UP THERECOVERY OF NPAS IN TIMES TO COME.LOK ADALATS: THE LOK ADALATS INSTITUTIONS HELP BANKS TO SETTLE DISPUTES INVOLVING ACCOUNTS IN DOUBTFUL AND LOSS CATEGORIES. THESE ARE PROVED TO BE AN EFFECTIVE INSTITUTION FOR SETTLEMENT OF DUESIN RESPECT OF SMALLER LOANS. THE LOK ADALATS AND DEBT RECOVERY TRIBUNALS HAVE BEEN EMPOWEREDTO ORGANIZE LOK ADALATS TO DECIDE FOR NPAS OF RS. 10 LAKHS AND ABOVE.

ASSET RECONSTRUCTION COMPANY (ARC): THE NARASIMHAM COMMITTEE ON FINANCIAL SYSTEM

(1991) HAS RECOMMENDED FOR SETTING UP OF ASSET RECONSTRUCTION FUNDS (ARF). THE FOLLOWING CONCERNS WERE EXPRESSED BY THE COMMITTEE.IT WAS FELT THAT CENTRALIZED ALL INDIA FUND WILL SEVERELY HANDICAP IN ITS RECOVERY EFFORTS BY LACK OF WIDESPREAD GEOGRAPHICAL REACH WHICH INDIVIDUAL BANK POSSES AND GIVEN THE LARGE FISCAL DEFICITS,THERE WILL BE A PROBLEM OF FINANCING THE ARF. SUBSEQUENTLY, THE NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS HAS RECOMMENDED FOR TRANSFER OF STICKY ASSETS OF BANKS TO THE ARC. THEREAFTER THE VARMA COMMITTEE ON RESTRUCTURING WEAK PUBLIC SECTOR BANKS HAS ALSO VIEWED THESEPARATION OF NPAS AND ITS TRANSFER THEREAFTER TO THE ARF IS AN IMPORTANT ELEMENT IN A COMPREHENSIVE RESTRUCTURING STRATEGY FOR WEAK BANKS. IN RECOGNITION OF THE SAME ARC BILL WAS PASSED TO REGULATE SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST. THE ICICI BANK, STATE BANK OF INDIA AND IDBI HAS PROMOTED THE COUNTRY’S FIRST ASSET RECONSTRUCTION COMPANY. THE COMPANY IS SPECIALIZED IN RECOVERY AND LIQUIDATION OF ASSETS. THE NPAS CAN BE ASSIGNED TO ARC BY BANKS AT A DISCOUNTED PRICE. THE OBJECTIVE OF ARC IS FLOATING OF BONDS AND MAKING NECESSARY STEPS FOR RECOVERY OF NPAS FROM THE BORROWERS DIRECTLY. THIS ENABLES A ONE TIME CLEARING OF BALANCE SHEET OF BANKS BY STICKY LOANS.

CORPORATE DEBT RESTRUCTURING (CDR): THE CORPORATE DEBT RESTRUCTURING IS ONE OF THE METHODS SUGGESTED FOR THE REDUCTION OF NPAS. ITS OBJECTIVE IS TO ENSURE A TIMELY AND TRANSPARENT MECHANISM FOR RESTRUCTURE OF CORPORATE DEBTS OF VIABLE CORPORATE ENTITIES AFFECTED BY THE CONTRIBUTING FACTORS OUTSIDE THE PURVIEW OF BIFR, DRT AND OTHER LEGAL PROCEEDINGS FOR THE BENEFIT OF CONCERNED. THE CDR HAS THREE TIER STRUCTURE VIZ.,A. CDR STANDING FORUM B. CDR EMPOWERED GROUP AND C. CDR CELL.

CIRCULATION OF INFORMATION OF DEFAULTERS: THE RBI HAS PUT IN PLACE A SYSTEM FOR PERIODICAL CIRCULATION OF DETAILS OF WILLFUL DEFAULTERS OF BANKS AND FINANCIAL INSTITUTIONS. THE RBI ALSO PUBLISHES A LIST OF BORROWERS (WITH OUTSTANDING AGGREGATE RUPEES ONE CRORE AND ABOVE) AGAINST WHOM BANKS AND FINANCIAL INSTITUTIONS IN RECOVERY OF FUNDS HAVE FILED SUITS AS ON 31 MARCH EVERY YEAR. IT WILL SERVE AS A CAUTION LIST WHILE CONSIDERING A REQUEST FOR NEW OR ADDITIONAL CREDIT LIMITSFROM DEFAULTING BORROWING UNITS AND ALSO FROM THE DIRECTORS, PROPRIETORS AND PARTNERS OF THESE ENTITIES.

RECOVERY ACTION AGAINST LARGE NPAS: THE RBI HAS DIRECTED THE PSBS TO EXAMINE ALL CASES OFWILLFUL DEFAULT OF RS. ONE CRORE AND ABOVE AND FILE CRIMINAL CASES AGAINST WILLFUL DEFAULTERS. THE BOARD OF DIRECTORS ARE REQUESTED TO REVIEW NPAS ACCOUNTS OF ONE CRORE AND ABOVE WITH SPECIAL REFERENCE TO FIX STAFF ACCOUNTABILITY IN INDIVIDUALLY. IT IS OBSERVED

FROM THE ABOVE TABLE THAT THE GROSS NPAS OF THE BANKS IS GRADUALLY DECLINING FROM RS. 68717 CRORES IN 2002 - 03 TO RS. 50552 CRORES IN 2006 – 07 WHEREAS THE NET RECOVERY OF NPAS IS INCREASING FROM RS. 23183 CRORES IN 2002 - 03 TO RS. 27176 CRORES IN 2006 – 07. IT SHOWS THAT THE BANKS HAVE TAKEN STRENUOUS EFFORTS TO CONTAIN THE NPAS. MOREOVER THE PERCENTAGE OF RECOVERY TO GROSS NPAS IS ALSO IN THE INCREASING TREND.

CREDIT INFORMATION BUREAU: THE INSTITUTIONALIZATION OF INFORMATION SHARING ARRANGEMENT IS NOW POSSIBLE THROUGH THE NEWLY FORMED CREDIT INFORMATION BUREAU OF INDIA LIMITED (CIBIL) IT WAS SET UP IN JANUARY 2001, BY SBI, HDFC, AND TWO FOREIGN TECHNOLOGY PARTNERS. THIS WILL PREVENTTHOSE WHO TAKE ADVANTAGE OF LACK OF SYSTEM OF INFORMATION SHARING AMONGST LEADING INSTITUTIONSTO BORROW LARGE AMOUNT AGAINST SAME ASSETS AND PROPERTY, WHICH HAS IN NO MEASURES CONTRIBUTEDTO THE INCREMENTAL OF NPAS OF BANK

GLOBAL FINANCIAL CRISIS AND NON PERFORMING ASSETS MEASURES TAKEN BY RBI IN REGARDS TO FINANCIAL HEALTH AND ITS INSULATION

RBI TOOK A SERIES OF MEASURES IN ADDITION TO PROVIDING LIQUIDITY AND SPECIAL REFINANCE. WHILE THE IMPACT OF GLOBAL RECESSION ON INDIA CANNOT BE WISHED AWAY, INDIAN BANKS,

ENCOURAGED BY THE GOVERNMENT AND RBI, ROSE TO THE OCCASION TO IMPLEMENT VARIOUS STIMULUS PACKAGES AND RESTRUCTURED FACILITIES TO TIDE OVER THE CRISIS. IN THE MIDDLE OF THE PREVIOUS FINANCIAL YEAR, THE VOLATILITY IN THE GLOBAL FINANCIAL MARKETS AND CLOSURE OF MANY BIG BANKS IN THE WESTERN WORLD HAS GIVEN A SHOCK TO THE BANKING SYSTEM IN INDIA. HOWEVER, THE STRONG FUNDAMENTALS OF BANKS AS WELL AS SUPPORT AND GUIDANCE BY REGULATORS HELPED MITIGATE THE SEVERITY OF THESE TRANS-NATIONAL DEVELOPMENTS. HAVING WITHSTOOD THE TESTING TIMES, THINGS ARE LOOKING BRIGHT, AS SIGNS OF RECOVERY OF INDIAN ECONOMY ARE VISIBLE. IT GIVES US SOME HOPE THAT WE CAN EXPECT ROBUST GROWTH OF THEINDIAN BANKING INDUSTRY IN THE MEDIUM TERM.

PRIVATE BANKS AND NPA - KEEPING IN VIEW THE FINANCIAL YEAR 2009 SECOND QUARTERLYRESULTS OF THE INDIAN BANKING SECTOR, THE INDUSTRY BODY, THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY (ASSOCHAM) HOLDS THAT ALTHOUGH THE INDIAN BANKING SECTOR HAS REMAINED INSULATED FROM THE GLOBAL FINANCIAL CRISIS, THE EMERGING TRENDS DO NOT GIVE POSITIVE SIGNALS. THIS ANALYSIS OF THE INDIAN BANKING SECTOR IS BASED ON THE QUARTERLY RESULTS POSTED BY 25 INDIAN BANKS ON BOMBAY STOCK EXCHANGE (BSE) FROM 20TH 29TH OCTOBER 2008. FOR A MACRO ANALYSIS, THE TOTAL 25 BANKS INCLUDED AN AGGREGATION OF 15 PUBLIC SECTOR BANKS (PSBS) AND 10 PRIVATE SECTOR BANKS.ASSOCHAM HAS REVEALED THAT ON AN AVERAGE 24% RISE IN NET NON PERFORMING ASSETS (NPAS) HAVE BEEN REGISTERED BY 25 PUBLIC SECTOR AND COMMERCIAL BANKS DURING THE SECOND QUARTER OF THE FY’09 AS AGAINST Q2-FY’08. HOWEVER, THE AVERAGE CAPITAL ADEQUACY RATIO (CAR) OF THE BANKS SLIPPED TO 12.68 PER CENT IN Q2-FY ‘09 FROM 13.41% IN THE PREVIOUS YEAR. AS PER ASSOCHAM STUDY, THE AGGREGATE NET NON-PERFORMING ASSETS (NPA) OF 25 BANKS INCREASED BY 24.36% TO RS 17,522.82 CRORE IN SECOND QUARTER OF 2008-09 FROM RS 15,462.84 CRORE IN THE SAME PERIOD OF FY’08.

KARUR VYSYA BANK RECORDED MAXIMUM RISE OF 275.36 PER CENT IN NET NPAS IN Q2-FY’09WITH RS. 50.03 CRORE AS AGAINST RS 13.33 CRORE IN Q2-07. IT WAS FOLLOWED BY HDFC BANK WITH AN INCREASE BY 139%, VIJAYA BANK (132%), STATE BANK OF HYDERABAD (81.42%) AND IDBI (57%).AMONG THE PRIVATE BANKS, YES BANK HAS SHOWN HIGHEST GROWTH IN NNPA, FOLLOWED BY SOUTH IND BANK. THE NPA OF ICICI BANK HAS INCREASED TO RS 4554 CRORE DURING FY2008-09. THIS TREND SUGGESTS THAT THE NNPA AND SUCH CONTAGION HAVE STARTED CREEPING IN, THOUGH IN LOW INTENSITY WITH LESS MAGNITUDE DUE THE REASONS EXPLAINED ABOVE.

NPA AND PUBLIC SECTOR BANKS - ON THE CONTRAST, SEVEN MAJOR PSBS RECORDED ASIGNIFICANT DECREASE IN NET NPAS, INCLUDING CENTRAL BANK OF INDIA (-87.39%), ORIENTAL BANK OF

COMMERCE (-82.18%), UNION BANK OF INDIA (-73.38%), DENA BANK (-17.24%), BANK OF INDIA (-14.80 CRORE), BANK OF MAHARASHTRA (-7.75 CRORE) AND INDIAN BANK (-1.54%) HAVE SHOWNIMPROVEMENT IN NET NPA LEVELS. WHEREAS, AMONG THE PRIVATE SECTOR BANKS ONLY SOUTH INDIANBANK REGISTERED AN IMPROVEMENT IN NET NPAS BY -29.82%.

MOVEMENTS IN NPA’S

NPA’S RECOVERED BY SCB’S THROUGH VARIOUS CHANNELS

AMONG THE VARIOUS CHANNELS OF RECOVERY AVAILABLE TO BANKS FOR DEALING WITH BAD LOANS, THE SARFAESI ACT AND THE DEBT RECOVERY TRIBUNALS (DRTS) HAVE BEEN THE MOST EFFECTIVE IN TERMS OF AMOUNT RECOVERED. THE AMOUNT RECOVERED AS PERCENTAGE OF AMOUNT INVOLVED WAS THE HIGHEST UNDER THE SARFAESI ACT, FOLLOWED BY DRTS.

NPA’S

THE SECTOR-WISE ANALYSIS OF NPAS OF PUBLIC AND PRIVATE SECTOR BANKS INDICATES THAT THE NPAS INTHE PRIORITY SECTOR INCREASED BY 11.1 PER CENT DURING 2007-08 (4.8 PER CENT IN THE PREVIOUS YEAR)MAINLY DUE TO INCREASE IN NPAS IN THE AGRICULTURE SECTOR (32.1 PER CENT) AND IN THE NON-PRIORITYSECTOR (10.3 PER CENT).

AT THE AGGREGATE LEVEL, THE SHARE OF PRIORITY SECTOR NPAS IN TOTAL NPAS AT 54.4 PER CENT

WAS

BROADLY SAME AS IN THE PREVIOUS YEAR (54.0 PER CENT)

NON PERFORMING ASSETS OF FINANCIAL INSTITUTIONS

IN ABSOLUTE TERMS, NET NPAS OF EXIM BANK AND NABARD DECLINED DURING 2007-08, WHILE THATOF SIDBI INCREASED SHARPLY (TABLE VI.10). IN TERMS OF NET NPA TO NET LOANS RATIO, THE ASSETQUALITY OF EXIM BANK IMPROVED SHARPLY, WHILE THAT OF NABARD IMPROVED MARGINALLY.ALTHOUGH THE NET NPAS TO NET LOANS RATIO INCREASED IN RESPECT OF SIDBI AT END-MARCH 2008 AS COMPARED WITH END- MARCH 2007, THE RATIO WAS QUITE LOW OTHERWISE. SIGNIFICANTLY, INCONTINUATION OF THE TREND WITNESSED DURING LAST FEW YEARS, NHB DID NOT HAVE ANY NPAS